AstraZeneca vs. GlaxoSmithKline

This article has been adapted from our sister site across the pond, Fool U.K.

We have said many times at the Fool that the pharmaceutical industry is a great sector to invest in at the moment. In particular, Big Pharma companies have been out of favor with the markets and are looking really cheap.

What's more, these businesses have strong defensive characteristics, which means they should stand up well through the troubled times we live in.

If you are going to invest in Big Pharma in the U.K. you basically have a choice between two: either AstraZeneca (NYSE: AZN) or GlaxoSmithKline (NYSE: GSK) . The question is, if you could only invest in one of these companies, which would it be?

The fundamentalsWell, first of all, let's look at the fundamentals.

AstraZeneca's price of 2,950p at the time of writing puts it on a trailing P/E ratio of 6.4, with a dividend yield of 6.3%. The last quarterly results showed sales down 2% at 5.1 billion pounds and profits edging downwards to 2 billion pounds -- but both numbers were ahead of expectations.

How does this compare with GlaxoSmithKline? Well, GSK's price as I write this article is 1,380p, which puts it on a trailing P/E ratio of 12 and a dividend yield of 5%. The company'slatest quarterly results showed revenue of 7.1 billion pounds, which was slightly ahead of expectations, being up 3% on the year before. Pre-tax profit of 2 billion pounds was in line with the consensus view.

Looking down the edge of a cliffWell, so far so good. Sales and profits for both these companies seem to be holding up pretty well. But there is something rather important we haven't mentioned yet: the patent cliff.

For GSK, the world's fourth most popular drug, asthma treatment Seretide (also known as Advair), is coming off patent this year, though there is not yet a generic drug to go up against it. Plus, in 2012, the diabetes treatment Avandia comes off patent. Together, Avandia and Seretide represented 24% of GlaxoSmithKline's 2010 revenues.

But the blow is softened by the impressive strength of GSK's drugs pipeline, with 36 drugs at the phase III stage, including several potential blockbusters such as Relovair and heart disease drug darapladib.

The situation is rather worse for AstraZeneca, which is looking at losing five of its biggest drugs in a five-year period. It lost Arimidex in 2010, and it is losing its exclusivity to schizophrenia drug Seroquel this year. Then next year, asthma treatment Symbicort comes off patent, followed by anti-cancer medicine Iressa in 2013 and blockbuster heartburn drug Nexium in 2014.

But what of AstraZeneca's drugs pipeline? Does it have new products lined up to replace its fading stars? Well, although I think the company made the right strategic move by taking over MedImmune, thus strengthening its portfolio of biologics, overall its pipeline is substantially weaker than GSK's.

If you have been wondering why AstraZeneca is priced so cheaply, this is the reason. Not only is it staring over a massive and gaping patent cliff, but it also has a disappointing drugs pipeline.

You get what you pay forIt is not always correct to say "you get what you pay for" when it comes to shares, but in this case, I think the saying rings true. AstraZeneca is as cheap as chips because it could suffer a substantial reduction in profits in years to come, whereas GlaxoSmithKline is more expensive as it has much better future prospects and is likely to substantially grow its profits over the next five years.

So, which should you invest in? Well, it's a tough call. Indeed, there is a strong case for hedging your bets and buying a stake in both companies, just as oft-quoted income guru Neil Woodford has done.

But if I could only invest in one of these companies, I will stick my neck out and say GlaxoSmithKline. Why? Because I would rather buy into a company that is growing yet reasonably priced, than invest in a company in decline, no matter how cheap it is.

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